The Swiss Franc: Where to From Here?

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Forex Market News

As the dust settles from the surprise move from the SNB and volatility returns to the artificially capped currency, so do the trading opportunities. Instead of complaining or standing back in shock, now is the time to jump in and get busy doing your technical analysis and identify the setups.

Generally when Central Banks get involved and start to manipulate their currencies, they do so in order to restore stability and confidence, which often eliminates trading opportunities and hence best to avoid getting involved as the market becomes artificially influenced.  Fundamental and technical trading strategies become skewed and less applicable as they are basically designed to apply under ‘normal market’ conditions.

Again, Central Banks would usually warn the market that their currency is moving too fast and maybe over or under valued and they are monitoring the market closely. They would warn currency speculators to beware that they will step in, when necessary, to restore calm and stability. They generally do this before they intervene !  This would also apply when they adjust or alter their intervention policies and/or strategy. Especially in the new world where ‘forward guidance’  has become the accepted practise in preparing the markets for significant policy changes.

However!  Not Thomas Jordan of the SNB!

Although they again cut interest rates by 50bps to offset the withdrawal of the 1.2000 floor in EURCHF, it certainly wasn’t enough to dampen the surprise move in the currency!

Anyway, what’s done is done.  Pain and suffering has been inflicted. Blood has flown. Money made and lost. Mostly lost.

Move on.

Where to now for the Swissy?

Let’s go back to August 2011 when the SNB first announced the EURCHF peg at 1.2000.  The cross was trading down around 1.0050ish and quickly appreciated to the 1.2000 floor. (See attached).

At the same time, August 2011, the EURUSD was trading roughly at an average of 1.4300. (See attached).

On January the 15th 2015, last Thursday, when the SNB pulled the floor, the EURUSD traded on average at 1.1500 let’s say, give or take 50 pips.

That’s a move of 28 big figures, or 2800 points in the EURUSD.

Let’s translate that to where the EURCHF was in August 2011 and where it effectively would/should have been if the SNB floor wasn’t implemented.

EURCHF August 2011 at 1.0050.  28 big figures lower would place the EURCHF around 0.7250!!
YES.  EURCHF at 0.7250!!
(My numbers maybe slightly out but you get the picture right.)

Where are we today?  1.0000

Now before you go ahead and smash EURCHF with everything you’ve got, check your levels and do your technical analysis. The market will remain relatively volatile, so pick your levels , adjust your position sizes and stoploss  sizes to avoid being taken out due to the excess volatility. Leave pending orders (sell limit) at extremities of current trading ranges and/or at horizontal and Fibonacci levels.  Look for turns in the market (ring highs) and momentum changes in price indicators to get short.

Risks.

Did someone say, “What about the SNB ?”  They have mentioned that they will potentially remain active in the market.   However, after their recent withdrawal, their credibility to a certain extent is shot. I don’t think they will make the same mistake again as far as setting a currency peg is concerned.  I think they will be more inclined to either/or continue to further cut rates into deeper negative territory and possibly intervene in a more passive aggressive manner by adding support to any significant downside pressure to EURCHF. This could be by adding bids in the market at 0.9500, 0.9000 etc.

Also, as the selloff was so sharp and aggressive with minimal liquidity, I have no doubt that there are numerous intermediaries out there still holding significant long EURCHF positions as well as corporates with the same exposure.  Hence, any rally we see back above 1.05 to 1.10 I think will see substantial selling waiting in the wings.

Funding.

I’m more than happy to pay a few dollars for the privilege of being short EURCHF and looking to make 500 to 1000 pips and more.

It’s like owning a 4WD. If you’re worried about the cost of petrol, then you shouldn’t be driving one!!! Go buy a pushbike!

And the cost just halved!

There’s another lesson. You need to put yourself in a position to benefit from market movements, i.e. You need to have the trade on!  Not riding a pushbike!!

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